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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

                                See accompanying condensed notes to consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

                                        See accompanying condensed notes to consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)

                                        See accompanying condensed notes to the consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1)   Basis of Presentation and Nature of Business

(2)   Marketable Securities

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(3)   Stock Based Compensation

(4)   Inventories

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(5)   Comprehensive Income

(6)   Foreign Currency Contracts

(7)   Recent Accounting Developments

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(8)   Warranty Reserve

(9)   Litigation

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ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items from the Company’s consolidated statements of operations. Percentage amounts may not total due to rounding.

Critical Accounting Policies.

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies. The following accounting policies are considered by management to be the most critical to the presentation of the consolidated financial statements because they require the most difficult, subjective and complex judgments:

RevenueRecognition. Revenue for product sales, including hardware and consumables, which are bundled together for shipment to the customer, is recognized on shipment, at which point the following criteria of SAB Topic 13(A)(1) have been satisfied:

We accrue for warranty costs and sales returns at the time of shipment based upon past experiences.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Revenue for maintenance agreements is recognized on a straight-line basis over the life of the contracts (commencing once the period covered by standard warranty expires) based on renewal prices.

Revenue Arrangements with Multiple Deliverables. EITF 00-21, “Revenue Arrangements with Multiple Deliverables” provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. In some arrangements, the different revenue-generating activities are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the activities. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The adoption of EITF 00-21 did not have any impact on the financial position or results of operations of the Company.

Allowance For Doubtful Accounts And Sales Returns. The Company records a reserve for accounts receivable that are potentially uncollectible. The reserve is established by estimating the amounts that are potentially uncollectible based on a review of customer accounts, the age of the receivable, the customer’s financial condition and industry, and general economic conditions. The Company also records a reserve for sales returns from its customers. The amount of the reserve is based upon historical trends, timing of new product introductions and other factors. Results could be materially different if economic conditions worsened for the Company’s customers.

Inventory Reserves. The Company records reserves for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. The amounts of these reserves are based upon historical loss trends, inventory levels, physical inventory and cycle count adjustments, expected product lives and forecasted sales demand. During the three- and nine-month periods ended September 30, 2003, obsolescence charges of approximately $24,000 and $118,000, respectively, were taken on Desktop inventory due to the introduction of the new Desktop line of products at the end of the second quarter of fiscal year 2003. Results could be materially different if demand for the Company’s products decreased because of economic or competitive conditions, or if products became obsolete because of technical advancements in the industry or by the Company.

Deferred Tax Assets. The Company recognizes deferred tax assets for the expected future tax impact of temporary differences between book and taxable income. A valuation allowance and income tax charge are recorded when, in management’s judgment, realization of a specific deferred tax asset is uncertain. Income tax expense could be materially different from actual results because of changes in management’s expectations regarding future taxable income, the relationship between book and taxable income and tax planning strategies employed by the Company.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Warranty Reserves. The Company’s non-consumable products are warranted to the end-user to ensure end-user confidence in design, workmanship, and overall quality. Warranty lengths vary by product type, ranging from periods of six to twelve months. Warranty covers parts, labor, and other associated expenses. The Company performs the majority of warranty work, while authorized distributors and dealers also perform some warranty work. Warranty expense is accrued at the time of sale based on analysis of historical claims experience, which includes labor and parts costs and the proportion of parts that can be re-used.

Results of Operations

Revenues.     Revenues increased 9.8% to $13.8 million for the three-month period ended September 30, 2003 from $12.6 million for the same prior-year period. The increase in revenues was primarily due to increased volume of desktop line equipment sales totaling $769,000, increased volume of producer line equipment sales totaling $516,000 from our European operations and increased volume of aftermarket products sales totaling $487,000 offset by a decrease in volume of domestic producer line equipment sales of $292,000. Revenues increased 9.7% to $38.1 million for the nine-month period ended September 30, 2003 from $34.8 million for the same prior-year period. The increase in revenues was primarily due to the increased volume of aftermarket products sales totaling $2.5 million and increased volume of producer line equipment sales of $1.6 million from our European operations. The increase in revenues was also due to the positive impact on our European operations of the weakening U.S. dollar.

As of and for the nine months ended September 30, 2003, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $13,735,000, $471,000 and $5,438,000, respectively. As of and for the nine months ended September 30, 2002, foreign revenues from unaffiliated customers, operating earnings, and net identifiable assets were $10,050,000, $342,000 and $4,014,000, respectively. The growth is due to increasing penetration in the foreign markets of sales of CD-R and DVD-R products.

Gross profit.    Gross profit as a percent of revenues was 48.5% and 49.2% for the three- and nine- month periods ended September 30, 2003, respectively, compared to 49.0% and 48.9% for the same prior-year periods. The decrease in gross profit as a percentage of revenues for the three-month period ended September 30, 2003 was primarily due to the increased sales of our Desktop line of products, which carries a slightly lower margin than our producer line of products. The increase in gross profit as a percentage of revenues for the nine-month period ended September 30, 2003 was primarily due to increased sales of producer line products and aftermarket consumable products.

Operating expenses.    Selling, general and administrative expenses during the three- and nine-month periods ended September 30, 2003 were $2.8 million or 20.3% of revenues and $8.3 million or 21.7% of revenues, respectively compared to $2.5 million or 19.9% of revenues and $7.3 million or 21.0% of revenues during the same prior year periods. These increases in expense are due to increased wages due to increased commissions paid on sales, increased legal expenses and

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

increased co-op marketing program expenses offset by a decrease in advertising expenses during the three- and nine-month periods ended September 30, 2003. Research and development expense during the three- and nine-month periods ended September 30, 2003 were $867,000 or 6.3% of revenues and $2.6 million or 6.9% of revenues, respectively compared to $852,000 or 6.8% of revenues and $2.7 million or 7.9% of revenues during the same periods of 2002.

Other income/(expense).     The Company recognized interest income on cash investments of $127,000 and $398,000 during the three- and nine-month periods ended September 30, 2003 compared to $189,000 and $625,000 during the same prior year periods. This decrease is due to a decrease in interest rates. Also included in other income, the Company recognized a loss on currency exchange of $12,000 and $25,000 during the three- and nine-month periods ended September 30, 2003 compared to losses of $29,000 and $8,000 during the same prior year periods.

Income before income taxes.     Income before income taxes during the three- and nine-month periods ended September 30, 2003 were $3.1 million or 22.6% of revenues and $8.2 million or 21.5% of revenues, respectively compared to $3.0 million or 23.6% of revenues and $7.6 million or 21.8% of revenues during the same prior year periods. The increase during the three- and nine-month period ended September 30, 2003 was primarily due to increased European channel sales and increased demand for DVD-R publishing equipment.

Income taxes.     The provision for income taxes represents federal, state, and foreign income taxes on earnings before income taxes. Income tax expense for the three- and nine-month periods ended September 30, 2003 amounted to $1.1 million and $3.0 million, respectively, or 36.5% of income before income taxes. The Company anticipates an effective tax rate of 36.5% for the remainder of 2003. Income tax expense for the three- and nine-month periods ended September 30, 2002 amounted to $1.1 million and $2.8 million, respectively, or 36.5% of income before income taxes.

Liquidity and Capital Resources

The Company expects to fund its anticipated cash requirements (including the anticipated cash requirements of its capital expenditures) with internally generated funds and, if required, from the Company’s existing credit agreement. This credit agreement allows for advances under a revolving loan up to a maximum advance of $5,000,000. At September 30, 2003, there were no amounts outstanding under the credit agreement.

Current assets are $56.2 million as of September 30, 2003 compared to $47.3 million as of December 31, 2002. The allowance for doubtful accounts and sales returns as a percentage of receivables was 10% and 9% as of September 30, 2003 and December 31, 2002, respectively. Current liabilities are $8.0 million as of September 30, 2003 compared to $6.6 million as of December 31, 2002. This increase primarily reflects increased accruals for income tax and payroll.

Net cash provided by operating activities was $6.7 million and $6.1 million for the nine months ended September 30, 2003 and 2002, respectively. This increase was primarily the result of timing

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

of collection of trade accounts receivables offset by increased stocking of inventories for future orders and service requirements.

Net cash used in investing activities was $4.5 million and $10.6 million for the nine months ended September 30, 2003 and 2002, respectively. This decrease was primarily due to greater maturities of marketable securities offsetting increased purchases of marketable securities and increased capital expenditures related to tooling and production setup for the new Desktop products during the first nine months of 2003. Net cash provided by financing activities of $897,000 and $267,000 during the nine months ended September 30, 2003 and 2002, respectively, reflected proceeds from stock option and warrant exercises.

The Company believes that inflation has not had a material impact on its operations or liquidity to date.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties. The Company’s actual results could differ significantly from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, changes in media or method used for distribution of software, technological changes in products offered by the Company or its competitors and changes in general conditions in the computer market, as well as other factors not now identified. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Company has a policy of using forward exchange contracts to hedge net exposures related to its foreign currency-denominated monetary assets and liabilities. The primary objective of these hedging activities is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. (See footnote 6.)

Item 4.   Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer, Bernard P. Aldrich, and the Company’s Chief Financial Officer, Robert M. Wolf, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon such review, they have concluded that these disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

(b)    Changes in Internal Control Over Financial Reporting

There have been no significant changes in internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonable likely to materially affect the registrant’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Change in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Securities Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

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SIGNATURES

In accordance with the Exchange Act, this report has been signed below by following persons on behalf of the registrant and on the dates indicated.

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